Counsel will review reasons for San Diego audit delay

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While the city alerted investors that the 2010 audit – an essential barometer of the city’s financial health – will be six months late, its outside disclosure counsel said he would look into questions about whether the delay is caused by misallocation of funds rather than computer problems.

The city was not legally required to notify investors of the audit problems, but made the announcement in response to inquiries by inewsource, a nonprofit investigative reporting unit at San Diego State University. The city’s inability to assess its financial condition has derailed at least one bond refinancing. The city had estimated the refinancing of the convention center bonds would have saved $3.3 million in interest over 10 years.

Meanwhile, the city’s outside disclosure counsel John McNally said he planned to ask questions about concerns raised by former City Attorney Michael Aguirre, who wondered if the delay is the result of inappropriate transfer of money from funds paid by ratepayers, such as water and sewer customers, to cover pension, payroll or operating expenses.

“In light of the concerns raised by Mr. Aguirre regarding the potential improper use of the enterprise funds, the prudent course is for me to make additional inquiry of (Chief Financial Officer) Mary Lewis and (Chief Operating Officer) Jay Goldstone regarding the reason for the delay in the closing of the books and the beginning of the audit process,” McNally said.

In an interview, Goldstone said, “There’s absolutely zero element of truth” to Aguirre’s concerns. “This delay has nothing to do with that. There’s been no misallocation.”

Goldstone said kinks related to “a major conversion to a new technology” with the city’s new computer system caused the delay.

He said some employee time was mistakenly charged to the wrong accounts because the wrong codes were used.

For example, he said, an engineer working in capital projects might work on seven projects in two weeks. Hours may be funded from different sources – including water and wastewater funds, Goldstone said.

City officials have yet to determine how widespread the problem is, and how much money is involved, but Goldstone insisted it’s not about deliberately diverting enterprise funds. In fact, he said, the general fund has probably been overcharged.

He added: “I’m not trying to blame people or say anyone did anything with malice … but it happened and I guess we didn’t fully appreciate the magnitude of it until we were well into the next fiscal year and were trying to close out the system …

The potential use of enterprise funds to pay daily operating costs or payroll – which typically should be paid through the general fund supported by tax dollars – strikes a nerve because of the city’s history of improperly diverting those funds. City managers in the past balanced departmental budgets with enterprise funds. The practice was exposed by a whistleblower in 2007.

Under pressure from then-City Attorney Aguirre, Mayor Jerry Sanders said he would put a stop to what he called “raids on enterprise funds throughout the city.”

After the problem was brought to light, the San Diego County grand jury assailed the practice as “hidden taxes.”

Aguirre said the city may be reverting to old behaviors in desperate financial times.

“Were enterprise funds spent for non-enterprise purposes?” Aguirre asked rhetorically. “The purpose of enterprise funds is to maintain the water department and wastewater departments. You can’t shift general work done in the city to enterprise funds. That would be a problem with our bondholders, a problem with our financial statements and that would be a problem with our audits.

“I’m not alleging anyone did anything. I’m just trying to piece it together like anyone else. These are storm warnings that need to be investigated. How much was charged against the enterprise funds that should not have been? How large is that number, and if it’s a material number, who was it that allowed that to happen?”

In initial interviews, Goldstone said the accuracy of payroll checks was not affected.” However, two employees who asked not to be quoted by name for fear of losing their jobs, said they had received inaccurate paychecks.

They said they have been overpaid by up to 33 percent, and know of others in the same situation, an unknown number of times since July. One said the city failed to take enough money out of a paycheck to cover benefits, and is now asking for the money back.

Goldstone said Wednesday that about 48 employees of 10,000 were affected by paycheck issues around July, and that the problems have been corrected.

The city’s Disclosure Practices Working Group, a charter-mandated panel, decided to disclose the delay to investors late Tuesday as a prudent response to anticipated articles in the press, said McNally, who is also president of the National Association of Bond Lawyers.

The group includes the city’s chief operating officer, chief financial officer, outside general disclosure counsel, and deputy city attorneys. Its mission is to protect the city by reviewing any disclosures that would potentially subject the city to liability under federal securities laws.

Under agreements the city has with bond issuers, the city must provide audited annual financial reports, either 270 or 285 days after the last day of the fiscal year, which was June 30. That means the city would not be obliged to report until sometime in March.

A version of this story ran in The San Diego Union-Tribune and on its web site.